Gilts and Bonds Explained: A UK Investor's Guide for 2026

Bonds rarely make headlines until something goes wrong, yet for most UK investors they are the second building block of a portfolio after shares. Understanding gilts and bonds comes down to a few ideas: the coupon, the maturity date, the link between price and yield, and sensitivity to interest rates. This guide explains each with illustrative numbers, covers the UK tax quirks that make gilts unusual, and shows how to buy them, starting from the UK Debt Management Office, which issues gilts for the government.

Key Takeaways

Question	Short, Practical Answer
What is a bond?	A loan that pays fixed interest (the coupon) and repays its face value on a set maturity date.
What is a gilt?	A UK government bond. Conventional gilts pay a fixed coupon; index-linked gilts adjust for inflation.
Why do prices fall when yields rise?	A fixed coupon is worth less once new bonds pay more, so the price drops until the return matches the market.
Are gilts risk-free?	Default risk is very low, but prices can fall sharply when rates rise, as 2022 showed.
Why are low-coupon gilts popular outside an ISA?	Gilt gains are free of Capital Gains Tax for individuals, while coupons are taxed as income.
Individual gilt or gilt fund?	A gilt held to maturity returns par. A fund never matures, so its value keeps moving with rates.

1. What a Bond Actually Is

A bond is a loan you make to a government or company. In return, the borrower promises regular interest and the return of your money on a fixed date. Three terms describe almost every bond:

• Par value. The amount repaid at the end, also called face, nominal or redemption value. Gilts are quoted per £100 nominal, so par is £100.
• Coupon. The fixed interest rate as a percentage of par. A 3% coupon pays £3 a year per £100 nominal, whatever price you paid.
• Maturity. The date par is repaid and the bond stops existing.

The coupon and par are fixed at issue. The price the bond trades at before maturity is not, and that is where the interesting behaviour comes from.

2. Gilts: The UK Government’s Bonds

Gilts are UK government bonds, issued by the Debt Management Office (an executive agency of HM Treasury), mostly through regular auctions. There are two main types:

• Conventional gilts pay a fixed coupon, normally in two instalments a year, and repay £100 per £100 nominal at maturity.
• Index-linked gilts adjust both coupons and the redemption value in line with inflation, measured by the Retail Prices Index (RPI). They protect purchasing power if held to maturity, but their prices still move with real interest rates and can fall significantly.

Gilts are commonly grouped as shorts (up to seven years to maturity), mediums (seven to 15 years) and longs (over 15 years). That grouping matters a great deal for how far prices can move.

3. Price and Yield: Why They Move in Opposite Directions

One illustrative example makes this clear. These are not current market yields.

Imagine a five-year bond with a £100 par value and a 3% coupon, bought at £100 when similar bonds also yield 3%. You expect £3 a year, then your £100 back.

Now suppose new five-year bonds pay 5%. Nobody will pay £100 for your £3 a year when a fresh bond pays £5, so your bond’s price must fall until a buyer earns 5% a year overall, from the coupons plus the gain as the price climbs back to £100. If yields fall instead, your coupon looks attractive and the price rises:

• Market yield falls to 2%: price rises to roughly £104.71.
• Market yield stays at 3%: price stays at £100.
• Market yield rises to 5%: price falls to roughly £91.34.

These use simple annual compounding; real gilts pay twice a year, so actual prices differ slightly. Notice the cash flows never changed. Only the price did, and the yield is simply the return those fixed payments deliver at that price.

A bond’s payments are fixed at issue. Its price is the only thing left to adjust, so when the market demands a different return, the price moves to deliver it.

4. Yield to Maturity vs Running Yield

You will see two yields quoted, and they answer different questions:

• Running yield is the annual coupon divided by the price. Our bond at £91.34 paying £3 has a running yield of about 3.28%. It describes income.
• Yield to maturity is the total annualised return if you buy today and hold to maturity. It includes the “pull to par”, here an £8.66 gain, which lifts the figure to 5%. It describes total return.

Below par, running yield understates the total return. Above par, it overstates it, because the premium you paid is lost as the price drifts back to £100. Yield to maturity is the fairer comparison, but it is quoted before tax and assumes the borrower pays in full.

5. Duration: How Sensitive Is Your Bond to Interest Rates?

Duration measures how much a bond’s price reacts to yield changes. As a rule of thumb, for each one percentage point move in yields, the price moves by roughly its duration in percent, in the opposite direction. Illustratively, if yields rise from 4% to 5%:

• Two-year bond, 4% coupon: duration about 1.9, price falls roughly 2%.
• Ten-year bond, 4% coupon: duration about 8, price falls nearly 8%.
• Thirty-year bond, 4% coupon: duration about 17, price falls roughly 15%.
• Thirty-year bond, 0.5% coupon: duration about 25, price falls roughly 22%.

Longer maturity and lower coupons both mean higher duration, because more of your money comes back at the end. Bond fund factsheets publish average duration: the best single guide to how far a fund could fall if yields rise.

6. Credit Risk: Gilts, Investment Grade and High Yield

Duration is about the price of money. Credit risk is about whether you get paid at all.

• Gilts are generally regarded as having very low default risk, because the government borrows in a currency it issues and can raise taxes.
• Corporate bonds pay extra yield over gilts, the credit spread, to compensate for the chance the company cannot pay.
• Investment grade means rated BBB- or above by S&P and Fitch, or Baa3 or above by Moody’s.
• High yield bonds sit below that line. Their prices tend to fall when the economy weakens, exactly when you want bonds to hold up.

Put simply, high-quality bonds are there for stability; high-yield bonds are there for income, with risks that behave more like shares.

7. The UK Tax Angle: Why Low-Coupon Gilts Became Popular

For UK individuals, gains on gilts are exempt from Capital Gains Tax (and losses cannot offset other gains), while coupons are taxable as savings income outside an ISA or SIPP. Inside those wrappers neither matters, as our guide to ISAs vs SIPPs explains.

The logic follows from section 4: yield to maturity combines the coupon, which is taxed, and the pull to par, which is not. Take an illustrative higher-rate taxpayer paying 40% on interest, comparing two five-year gilts each yielding 4% to maturity:

• Gilt A: 4% coupon, priced at £100. All the return is taxable income, leaving roughly 2.4% a year after tax.
• Gilt B: 0.5% coupon, priced at roughly £84.42. Only the small coupon is taxed, leaving roughly 3.8% a year after tax.

Same gross yield, very different result. That is why low-coupon gilts, many issued when rates were very low, became popular with higher and additional-rate taxpayers investing outside wrappers.

Caveats: the exemption covers gilts held directly, not funds or ETFs that own gilts. If your personal savings allowance covers your interest, the advantage largely disappears. Rules on accrued interest also apply when trading between coupon dates, so check your own position.

8. Individual Gilts vs Bond Funds and ETFs

Hold a conventional gilt to maturity and you receive £100 per £100 nominal, whatever its price did in between. That is fixed in pounds rather than purchasing power, but it is predictable, which suits known future spending.

A bond fund never matures. It keeps its maturity profile roughly constant by selling bonds as they shorten and buying longer ones, so it has a duration but no redemption date. The “hold to maturity and get par back” logic simply does not apply. Funds still offer diversification, easy regular investing and access to bonds impractical to buy individually. A common rule of thumb is that holding a fund for about its duration lets higher yields recover an initial price fall, though that is a tendency, not a guarantee.

Feature	Individual gilt	Gilt fund or ETF
Maturity	Fixed redemption date	None; holdings roll over
Value at a future date	Par, if held to maturity	Depends on yields at the time
Diversification	A single issue	Many issues
CGT outside a wrapper	Gains exempt	Gains generally taxable
Best suited to	Known spending dates	Long-term allocation

9. The 2022 Gilt Sell-Off: Safe Does Not Mean Stable

In 2022, inflation surged, the Bank of England raised Bank Rate repeatedly, and yields climbed quickly from historically low levels. Many gilts carried low coupons and long maturities, so the arithmetic in section 5 played out in full.

The sharpest phase followed the September 2022 fiscal statement known as the mini-budget. Gilt yields jumped within days, pension schemes using liability-driven investment strategies were forced to sell gilts to meet collateral calls, and the Bank of England stepped in with temporary purchases of long-dated gilts. Over the year, long-dated gilt funds fell by tens of percent, and some of the longest, lowest-coupon gilts lost more than half their value from their 2020 peaks.

• “Safe” means low default risk, not low price volatility.
• Starting yields matter. Very low yields offered almost no cushion.
• Duration is the volume knob. Long-dated holdings fell far further than short-dated ones.
• Diversification is not guaranteed. Bonds and shares fell together because the shock was inflation.

A gilt will almost certainly pay you back at maturity. What it is worth if you must sell before then is a different question.

10. What Bonds Do in a Portfolio

• Diversifier. High-quality bonds have often held up when shares fell sharply, though less reliably when inflation is the problem.
• Income. Coupons are known in advance, which makes planning easier.
• Liability matching. A gilt maturing just before a house deposit or early retirement delivers a known sum on a known date; a ladder of gilts maturing in successive years extends the idea.
• Rebalancing ballast. When shares fall, bonds are usually what you sell to top equities back up, as covered in our guide to rebalancing your portfolio.
• Smoother returns. Bonds typically lower volatility and maximum drawdown, measures explained in our guide to portfolio risk metrics.

11. How to Buy Gilts and Bonds in the UK

• A broker or investment platform. Many UK platforms offer gilts in general accounts, stocks and shares ISAs and SIPPs. Check availability, dealing charges and any minimum deal size.
• The DMO’s purchase and sale service. Private investors can deal in gilts through a DMO service and hold them on its register. It can be cheaper for small deals but is less immediate, and you do not control the exact price.
• Bond funds and ETFs. Bought like any fund or share, including inside ISAs and SIPPs.

One detail catches people out: gilt prices are quoted “clean”, excluding interest built up since the last coupon. Buying between coupon dates, you also pay that accrued interest, so the total cost is higher than the headline price.

A pre-purchase checklist:

1. Purpose. Diversifier, income or a known future payment?
2. Wrapper. ISA, SIPP or general account decides whether the coupon and gain split matters.
3. Yield to maturity. Compare this, not just running yield.
4. Duration. Could you live with the fall if yields rose one percentage point?
5. Credit quality. Do you understand why the yield is what it is?
6. Time horizon. Does the maturity date, or a fund’s duration, fit when you need the money?
7. Inflation. Conventional or index-linked?
8. Costs. Dealing, platform and fund charges all come off your yield.

12. Keeping Bonds in View Alongside Your Shares

Bonds earn their keep at the portfolio level, so it helps to see them next to everything else. InvestInsight’s portfolio tracker syncs a Trading 212 account through a read-only API key, or takes manual and CSV imports of buys, sells, dividends and fees. Bond ETFs and funds sit alongside your shares, with allocation by asset type, sector and region, while volatility, maximum drawdown, beta, Sharpe ratio and a benchmark against the S&P 500 show what your overall mix has actually done. Savings, pensions and property can be added manually for a net worth view.

The limits: InvestInsight does not show bond yields, duration or redemption schedules. For that, the DMO website lists gilts in issue, broker tools show prices and yields, and a spreadsheet works well for a gilt ladder’s maturity dates.

Common Mistakes to Avoid

• Confusing running yield with total return. A high-coupon bond bought well above par delivers less than it appears.
• Assuming gilts cannot fall. Default risk is low; price risk is not.
• Treating a bond fund like a bond. A fund has no maturity value to wait for.
• Mismatching duration and horizon. Long-dated bonds are a poor home for money needed in two years.
• Ignoring tax outside wrappers. Equal gross yields can leave very different after-tax returns.
• Reaching for yield. A much higher yield usually means more credit risk, more duration or both.

Conclusion

Gilts and bonds are simpler than they first appear. A bond is a set of fixed payments whose price moves to deliver whatever return the market demands. Yield to maturity tells you the total return, duration how far the price could move, and credit quality how confident you can be of being paid.

Gilts add very low default risk and a tax treatment that rewards attention outside a wrapper, while 2022 proved that low default risk is not a stable price. Decide what job your bonds are doing, match duration to your horizon, and choose between gilts and funds knowing what each can promise.

Further reading

These explainers go further into the mechanics covered above.

• Investopedia: what is a bond?
• Investopedia: yield to maturity
• Investopedia: duration
• Bank of England: interest rates and monetary policy

This article is for general information only and does not constitute financial advice. All figures are illustrative and historical patterns are not reliable indicators of future results. Consider your own circumstances or speak to a qualified adviser before making investment decisions.